Genuine Parts Company — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Genuine Parts distributes automotive replacement parts, industrial parts and business products through three segments.
Financial performance
- Q3 revenue: $4.723 billion, up 15.3% year over year; organic growth contributed about 4.3%, acquisitions 12.1%, and currency reduced growth by 1.1%.
- Q3 earnings: Net income was $220.2 million, up 39.0%; diluted EPS was $1.49 versus $1.08. Gross margin was 31.4% versus 30.0%; operating margin was 7.7% versus 7.6%.
- Nine-month revenue and earnings: Revenue was $14.131 billion, up 16.8%; net income was $623.8 million, up 22.7%; diluted EPS was $4.23 versus $3.44. Organic growth was 3.2%, acquisitions contributed 13.5%, and currency impact was flat.
- Nine-month margins: Gross margin was 31.4% versus 29.9%; operating margin was 7.6% versus 7.8%. The effective tax rate fell to 24.1% from 35.4%, reflecting U.S. tax reform and earnings mix.
- Segments, Q3 sales / operating profit: Automotive $2.650 billion / $226.7 million; Industrial $1.577 billion / $119.2 million; Business Products $495.9 million / $19.8 million. Business Products operating profit declined 17.2%.
- Cash flow, nine months: Operating cash flow was $925.5 million versus $542.4 million. Capital expenditures were $91.9 million, and operating cash flow less capital expenditures was approximately $833.6 million. Cash increased to $359.1 million.
- Debt and liquidity: Total debt was approximately $2.9 billion, down $331.1 million (10.2%) from year-end 2017; average debt cost was 3.00%. Current ratio was 1.3, unchanged. Management said cash generation and available credit lines should fund anticipated operations, including discretionary repurchases.
Changes, outlook and risks
- Q3 growth reflected the 2017 Alliance Automotive Group (AAG) acquisition; acquisitions contributed substantially more than organic growth. Management cited improved Q3 comparable sales and expense leverage, while nine-month operating margin declined amid lower first-half comparable growth and higher payroll, technology, security, freight and acquisition costs.
- The proposed Business Products Group combination with Essendant was terminated by Essendant on September 14, 2018. Genuine Parts received a $12.0 million termination fee. Q3 results included $3.1 million of net transaction-related income; nine-month results included $19.0 million of net transaction-related expense. Adjusted diluted EPS, a non-GAAP measure, was $1.48 for Q3 and $4.33 for nine months.
- No specific numerical earnings or revenue guidance was provided. Management emphasized organic growth, disciplined acquisitions, digital investment, footprint expansion, margin improvement and cost control; it expects these initiatives to support long-term performance.
- Risks highlighted include AAG integration and realizing expected synergies, changes in European aftermarket conditions, tariffs and trade disruption, foreign exchange, rising freight and labor costs, competition, vendor relationships, information-system disruptions and litigation. The company reported a jury damages award in a product-liability case but did not expect a material financial impact based on its defenses, insurance and reserves.
- The company guarantees approximately $724.3 million of borrowings for independent stores and affiliates; it reported covenant compliance and no significant historical losses on these guarantees. Adoption of the new lease standard was expected to significantly affect the balance sheet; operating lease commitments were approximately $1.14 billion at December 31, 2017.
Important facts to verify
- How much of reported growth and future performance is attributable to AAG acquisitions versus sustainable organic growth, and what integration synergies are being realized?
- Whether higher operating expenses and the weaker Business Products segment continue to pressure margins.
- The final effects of tax-reform accounting and the planned lease-standard adoption on earnings, liabilities and leverage.
- Potential exposure from guaranteed borrowings and the automotive product-liability matter.
- How management’s long-term initiatives translate into measurable results; the filing provides no formal numerical guidance.